The numbers are confirmed by the latest Origo stats, which show an alarming increase in transfers passing through its options service.

Origo Stats for their platform

So much for the Treasury’s predictions on the impact of Freedom and Choice on Defined Benefit Pension Transfers.

Vulnerable investors

There is , in the FCA’s cast-list , such a person as a “vulnerable investor”, defined as someone unfit to take rational decisions due to mental or physical incapacity.

I am tempted to include those active and deferred members of a DB plan as “vulnerable investors”.

The FCA recommend that vulnerable investors have special protections to ensure that they do not self-harm, when taking life-changing financial decisions. I suggest that special protection be given to those with eye-watering transfer values for whom the word “pension” no longer seems relevant.

Only a few weeks ago, the FTSE100 stood at 7700, today it is below 7000. I was at a session yesterday where we quizzed wealth managers on how they protected clients from major market downturns. The (provisional) £34.2bn that transferred into DC last year is a case in point.

Just how much financial resilience is there? What happens if the market falls below 6000? How will those drawing down units at 20% below purchase price recover from “pounds cost ravaging” AKA sequential risk? I heard no answers to those questions yesterday and I suspect that following a ten year bull run, such a scenario is far from wealth manager’s minds.

Wealth Managers show me charts with money flowing from accumulation, through transition to preservation and then inheritance, as if the point of his service was to avoid the question of income in retirement altogether. Were the generous tax reliefs on offer to these clients – supposed for inheritance tax mitigation?

It would seem that the pensions system established to supplement the state benefits, is being dismantled at a pace that quite outwits the Regulators. This weeks’ white paper earned this comment from LCP

This is a significant development in DB pensions policy, but it will be some time before many of the measures set out in the White Paper pass into law, if at all.

This week saw the Pensions Regulator and FCA issue a joint statement of intent to “work closer together”. LCP saw through that one too.

There is little real meat in this paper, with much of its content taken up in reciting what the two bodies are currently doing separately, before going on to ask what the two bodies could do jointly.

And finally we were treated to the Pensions Regulator’s second DB landscape report. LCP managed a notable hat-rick of put downs , commenting

This report (accompanied by a blog) provides a useful overview of aspects of the DB landscape that will be of interest to policymakers, but one cannot help think that the Regulator has much more detail on the landscape that it is choosing not to make public.

Are we getting the full story on transfers?

While Government fiddles, Rome burns.

Meanwhile, real people are doing real things to limit the damage. Before I had decamped to judge the wealth managers, I had had a pint and a burger with David Neilly. Here he is a few hours later collecting an award on behalf of Chive with his wife Karen.

David picks up the Chive award

David, Rich and Stefan were instrumental in bringing the problems at Port Talbot to the public eye. Al Rush, Al Cunningham, David Penny, Darren Cooke and many more great IFAs are now building a restitution service to help trustees and employers manage the problems created by unscrupulous advisers. Above all, this is Al Rush’s award.

It is up to blogs like mine, and their readership, to make it absolutely clear that the current system of transfer advice is failing the ordinary working person in this country.

The tripling of pension transfers over the past year is testament to that. If – as the FCA estimate- 53% of the transfers advised on in 2017 contained questionable advice, we are looking at around £18bn of these transfers, that should not have been made.

This year’s dividend prediction by Link (formerly Capita’s) still predicts a FTSE total dividend up on last year. No effect on cash flow; if you’re reinvesting dividends, then pound-cost averaging works in your favour. Markets have so far always recovered after drops. If they don’t, pension deficits won’t be the only worry.

I was think more in terms of DB schemes, per John Mather’s comment. Whether for a scheme or for an individual DC pot you will of course need a suitable cash or short bond buffer so that you don’t need to sell equity at low prices. I guess DC drawdown strategies aren’t flexible enough for that, nor, unlike ISA or direct investment, do they enable investment income to flow transparently to the beneficiary.
As for behaviour, I have no answer to that. I’ve been investing through both the near-50% market drops in the 2000’s, and it does take a bit of nerve to do nothing.

Another excellent blog Henry, these decisions to transfer out need clarity and best practice financial advice, can the market return a critical yield year in year out so the hard earned money can provide a comfortable retirement.

A tad gloomy about the ‘self-smoothing’ principle at the core of drawdown, I feel. Drawdown is very well-established in the US, supported by both simple heuristics and complex modelling. It’s had longer to get going but we will no doubt catch up. It’s also the same as averaging market conditions while in accumulation – a good thing one way round but not the other, apparently.
Incidentally, if self-smoothing (drawing at an ex ante real rate through changing market conditions that is ex post sustainable) is not feasible, it won’t be for CDC either. Mathematically, it’s the same problem. And don’t assume actuaries are any better than ordinary mortals at avoiding errors of judgement. They may even suffer more from over-confidence. The consequences of errors are different though, as CDC involves other people’s money, not your own. A counter-intuitive feature of smoothing is that errors of judgement may actually increase the SD of outcomes, by smoothing up when it was expected to be down and down when it was expected to be up! You rob Peter to pay Paul without realising that Peter is (actually) poorer, not richer, than Paul. We know from with-profits what kind of recrimination that sparks when it’s other people’s money.
The important errors arise from the way deviations from return trend themselves trend – over quite long periods. In fact, it is only intergenerational smoothing (taming the lottery of birth dates) that offers any significant utility relative to self-smoothing with drawdown. But these theoretical benefits are too hard to capture without errors and recrimination.
There are a lot of misunderstandings about the incremental benefits of CDC, as distinct from the benefits of not retiring capital when you return – a feature inherent in drawdown. Cost savings are not confined to collectivisation and pooling longevity risk provides less utility than is widely assumed, given that annuities can still be bought in the later stages if and when necessary.
I have just written about this, having been irked by the absence of any scepticism or genuine enquiry at the Work & Pensions Select Committee on CDC: https://www.fowlerdrew.co.uk/single-post/2018/03/20/CDC-at-HOC-there-are-none-so-blind.